Will the Good Times Keep on Rolling?
Executives from leading U.S. steel mills offered their perspectives on the market—past, present and future—during the Metals Service Center Institute’s annual meeting last month in Hawaii.“I don’t know that I can recall a period quite like 2004,” in which so many players in the steel industry made so much money, said Keith Busse, president and CEO of Steel Dynamics Inc.

He offered a global, historical perspective on the evolution of the steel market: In the 1950s, U.S. production was concentrated in large regional producers. The advent of electric arc furnace minimills in the 1980s, and the influx of foreign steel, heated up the competition in the last decades of the century. Domestic steel production was in the 100 million ton range in the 1950s and ‘60s, peaked at around 150 million tons in the ‘70s, “and today we’re back at that same 100 to 110 million tons we were at some 40 to 50 years ago,” Busse said, with about half the domestic steel produced by integrated mills and half by minimills.

After World War II, the United States became an attractive market for foreign steel, as governments around the world invested in their own countries’ steel industries, often dumping their excess production in North America. “Nationalized steel companies did not work out and governments [such as Great Britain, the USSR and those in Eastern Europe] started privatizing,” Busse explained, with the notable exception of China.

In the ‘90s, the United States became the world’s dumping ground for steel, and domestic integrated producers fell on hard times. “They had not adapted to lower cost technologies, they carried extremely high employee obligations, they required strong steel prices to stay afloat, and they were increasingly vulnerable to economic downturn,” Busse said.

When the manufacturing recession hit in 2000-2001, it caused a decline in domestic demand for steel. The industry’s capacity utilization slipped to about 70 percent. Steel prices dropped to a 20-year low of $225 a ton for hot-band in some markets. Some 35 steel companies filed for bankruptcy between 1998 and 2002.

In 2002, steel prices recovered to a peak around $400 a ton, with the help of government-aided supply constraints. Surviving mills shut down some production permanently, but restarted other idled facilities, increasing capacity and causing prices to moderate.

In 2003, the domestic economy began to rebound, though the pace of steel demand remained slow. Other idled mills came back online, lowering capacity utilization rates again. In the second half, however, signs of a raw material shortage appeared, and steel scrap prices rose at a rapid rate. Steel producers bumped up prices to recover their increased costs, but most integrated mills continued to lose money.

In 2004, the steel markets kicked up a notch. Inflation-adjusted steel prices reached historical highs due to record-high input costs. Including raw material surcharges—to offset premium-grade scrap prices that hit an astounding $450 a ton—flat-roll prices reached nearly $760 per ton, Busse said.

Scrap prices this year have moderated significantly, he added, “and if the scrap folks are a barometer of where we’re going in the marketplace, we’re all in trouble. But I don’t think that is a correct barometer,” Busse said.
Barring some unexpected factor, he expects carbon flat-roll steel prices to remain in the $550 to $600 per ton range, assuming demand stays firm and imports continue at a moderate pace.

“Strong world steel demand, higher global steel prices, the weaker dollar and high ocean freight rates all act as a disincentive to excessive imports,” Busse said. “Continued economic expansions suggest that U.S. demand will remain strong and possibly improve in some consuming markets. Another good year is likely for steel companies and steel service centers in 2005.”

Consolidation has been good for the industry, closing down antiquated production capacity, resulting in more flexible and productivity oriented labor agreements, and focusing company managers on profitability. “I don’t think we will return to the days where it is all about who can produce the most tons. We all recognize we are accountable to our shareholders, and we are focused on the bottom line.”

Pipe and tube perspective
Though the steel market has stabilized and prices have firmed at a higher level, the steel tubular market is suffering from excess capacity in some product lines, and excess imports from China, particularly in the OCTG and standard pipe markets, according to W. Byron Dunn, president and CEO of Lone Star Steel Co.

“In my view, the battle for profits will only result in good times if future demand balances with the operating rates of the tubing manufacturers and the tsunami of imports that we are staring in the face,” Dunn said.

Strong demand for energy-related products is testing the heat-treat capacity of the industry as “demand for alloy tubular grades continues to rise in proportion to the drilling rig count.”

The gathering, transmission and consumer distribution segments of the line pipe business in the U.S. have been lagging the market because of a “chronic problem with imports that has kept a firm foot on the throat of that product line since the line pipe trade case expired in 2002,” Dunn said. Imports now account for about 50 percent of the line pipe consumption in the United States.

Dunn sees growth in both the small- and large-diameter segments of the market later this year. “If imports don’t eat that demand, they [domestic producers] should have a pretty good improvement in the second half of 2005.”
Because of high natural gas prices, Dunn does not expect much growth in consumer demand for gas, and thus little new demand for gas distribution lines this year.

The outlook for specialty tubing is encouraging, however, with firming demand in such categories as agricultural, energy and other capital equipment. Domestic seamless producers are enjoying strong demand across all product lines.

On the supply side, he noted that tube mills can switch their output from one product to another—from OCTG to line pipe, for example—to chase demand. “I believe the longevity of the good times will, in part, depend on operating discipline to calibrate demand and capacity utilization to keep inventories in balance and margins in good shape.”

Dunn is bullish on the U.S. economy and continued demand for steel. Last year, raw material costs pushed tubular prices higher. “If prices move north again this year,” he said, “they will not be pushed up by cost, but rather they will be pulled up by demand.”

Nevertheless, service centers appear concerned about their inventory values, and are in a destocking mode. “The most uncertain issue for tubing distributors in the near term will be margin preservation,” as a softening in the flat-roll markets could lead to lower pipe selling prices.

Dunn’s main concern is import levels in the pipe and tube market, which have reached an 18-year high. “China alone accounts for nearly a million tons of tubular imports. If China continues at the same pace, they will exceed all other tubular imports combined,” Dunn noted.

“When you kill tubular demand in this country, it doesn’t take long for [domestic] flat-roll producers to really feel our pain,” Dunn said. “Imports hurt us all, they ruin our markets, rob our margins, steal our jobs.”

Chinese currency manipulations should remain at the center of the trade debate, he urged. “We should keep a spotlight on the rising tide of subsidized tubular imports from China and be prepared to defend our markets with trade litigation as required.”

Competition calls for innovation
The U.S. industry is up to the task of competing with China in its own backyard, “but we need to be increasingly innovative in how we service our customers,” suggested David Sutherland, president and CEO of Ipsco Enterprises, maker of plate and tubular products.

Ipsco forecasts strengthening demand in the manufacturing and construction sectors despite rising interest rates, high energy costs and inflation pressures.

Last year’s prosperity in the steel market was “not so much a question of demand, but of how the supply was impacted by world events and the cumulative impact of past decisions,” he said.

Underlying the answer to the question—how long will this favorable market continue—is what individual companies are doing to create their own success, Sutherland said. “We all have to work within the economic climate we are dealt, but how we fare depends on our own managerial actions. If we just revert back to the old strategies and tactics, we will get the same [poor] results as in the past.”

He described how one Chinese steelmaker developed a new model to enter a good market. The company supplies turnkey oil wells directly to energy companies, cutting out any middlemen such as steel distributors and fabricators. “We can all learn from this real-life example. Just doing it the same old way may set us up for the same result, or worse, sets us up to become redundant.”

Much of the plate market is supplied through service centers, but that is not guaranteed in the future. “We look at distribution as a supply channel to end users, and not just as customers in their own right. We pay a lot of attention to the efficiency of the supply chain. When it results in little added value, or worse, value reduction, we are obliged to find a better way to the end markets,” Sutherland said.